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SEC Fines Nikko Securities Unit
$2.5 Million for Falsifying Records

By

Patrick McGeehan Staff Reporter of The Wall Street Journal

Updated Aug. 28, 1998 1:09 a.m. ET

The Securities and Exchange Commission, taking action against the New York brokerage unit of Japan-based Nikko Securities Co. Ltd. for the second time in five years, fined the firm $2.5 million for falsifying its books again.

The fine is believed to be the biggest the SEC has levied against a major securities firm for violating one of the commission's orders. In addition, three former senior managers of Nikko's U.S. operation each agreed to six-month suspensions from the securities business and to pay $50,000 fines, the SEC said.

Without admitting or denying the charges, Nikko's U.S. operations agreed to pay the penalty and to comply with federal record-keeping and reporting laws.

In a complaint filed in federal court in Washington, the SEC alleged that for several months in 1994, Nikko Securities Co. International overstated the value of securities it owned and then sold them at inflated prices to its sister operation in London.

The firm's managers dressed up the sale as an arm's-length transaction at market prices when what it really represented was a cash infusion from one affiliate to another, the SEC alleged in its complaint. The U.S. unit wound up recording a $3 million loss, when it should have booked a loss of $20 million, said Paul V. Gerlach, associate director of the SEC's division of enforcement.

By doing so, the U.S. unit violated a 1993 agreement to cease and desist falsifying its books and records after the SEC found one of the firm's traders in New York had hidden $18 million in losses on unauthorized currency trades for several months.

To settle that matter, Nikko paid a $1 million fine to the SEC and agreed to have independent consultants review its procedures and recommend changes. Nikko carried out the latest falsifications while one consultant was in its New York offices to monitor the implementation of changes another consultant had recommended, according to the SEC.

After buying the securities, which were bonds backed by mortgage payments, at above-market prices, Nikko's London-based affiliate turned around in early 1995 and asked the U.S. unit to act as its agent in reselling them. A trader in the U.S. unit and his supervisor devised and carried out a plan to skim a profit of $842,851 from its sister unit on the resales, the SEC alleged. That misappropriation constituted another unreported cash infusion from the London affiliate and understated the U.S. unit's profits for February 1995 by $264,000, the SEC alleged.

The U.S. unit's risk manager notified regulators of the second set of transactions and fired the employees involved, including its former chief financial officer, Nikko said. Neither Nikko nor the SEC would name those individuals, but the SEC said its investigation into the transactions is continuing.

In a statement, Timothy E. Cronin, chairman of Nikko's U.S. unit said: "Nikko responded promptly and forcefully when it learned of improper activities by now-former employees, and the firm has cooperated completely and voluntarily with the Commission since we first informed them of this in June of 1995."

The three executives suspended and fined by the SEC were executives of Nikko in Japan who were rotating through top-management jobs at the U.S. unit in 1994, the SEC said. They are Masao Ebina, who was chairman and chief executive of the U.S. unit at the time, Tadao Osada, who was president, and Toshiyuki Sagiuchi, who ran the bond division.

A spokeswoman for the U.S. unit said she didn't know if any of them were still working for the parent company.